M/s. Komatsu India Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 38/CHNY/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7829 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 21-09-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 07-01-2013
• Court: TRIBUNAL
• Department Lawyers: JAIRAM RAIPURA
• Keywords: Depreciation; Transfer pricing; International transaction; Arm length price
• Section: 143(3); 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , # $ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 38/MDS/2013 / ASSESSMENT YEAR : 2008-09 M/S. KOMATSU INDIA PRIVATE LTD., PLOT NO. A-1, SIPCOT INDUSTRIAL ORAGADAM, SRIPERUMBUDUR TALUK, KANCHEEPURAM, TAMIL NADU - 631 604. [PAN: AACCK 7292H] VS. DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE - II(4), CHENNAI. ( / APPELLANT) ( /RESPONDENT) & ' / APPELLANT BY : SHRI VIKRAM VIJAYARAGHAVAN, ADVOCATE *+& ' / RESPONDENT BY : SHRI JAIRAM RAIPURA, CIT ' /DATE OF HEARING : 21.09.2016 ' /DATE OF PRONOUNCEMENT : 20.12.2016 /O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER: THE ASSESSEE HAS FILED APPEAL AGAINST THE ORDER OF ASSESSING OFFICER U/S. 143(3) R.W.S. 144C(3) DATED 31.10.2012 PASSED UNDER THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) DATED 09.08.2012 . AT THE TIME OF HEARING :-2-: I.T.A. NO.38/MDS/2013 THE LD. AR OF THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING GROUND NO.S 2, 3, 3.1, 3.2 AND 3.3 AND MADE ENDORSEMENT IN GROUNDS OF APPEAL AND TREATED AS DISMISSED. 2. THE BRIEF FACTS OF THE CASE, THAT THE ASSESSEE I S IN BUSINESS OF MANUFACTURE AND SALE OF DUMP TRUCKS AND FILED RETUR N OF INCOME ON 30.09.2008 DECLARING LOSS OF RS. 23,46,31,798/-. T HE RETURN OF INCOME WAS PROCESSED U/S. 143(1) ON 25.09.2009. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY UNDER THE CASS AND NOTICE U/S. 143(2) WAS ISSUED. IN RESPONSE TO THE NOTICE, THE LD. AR APPEARED FROM TIME TO TIM E AND EXPLAINED THE ACTIVITIES OF THE ASSESSEE COMPANY IN MANUFACTURING AND SALE OF DUMP TRUCKS AND AFTER SALES SERVICE SUPPORT. THE LD. AO FOUND THAT THERE ARE INTERNATIONAL TRANSACTIONS AND ARM LENGTH PRICE (ALP) HAS TO BE C ALCULATED AND ASSESSING OFFICER REFERRED TO TRANSFER PRICING OFFICER (TPO) UNDER THE PROVISIONS OF 92CA(I) OF THE ACT FOR COMPUTATION OF ARMS LENGTH P RICE. SUBSEQUENTLY, THE LD. TPO VIDE ORDER DATED 31.10.2010 MADE DOWNWARD A DJUSTMENT OF RS. 36,52,63,964/- IN PURCHASES FROM ASSOCIATED ENTERPR ISES (AE) AND WITH THESE ADJUSTMENTS DRAFT ASSESSMENT ORDER WAS PASSED U/S. 143(3) R.W.S 144C(1) OF THE ACT ON 21.12.2011 AGAINST THE DRAFT ASSESSMENT ORDER, THE ASSESSEE COMPANY FILED OBJECTIONS TO THE DISPUTE RESOLUTION PANEL (DRP) AND WHEREAS, DRP DIRECTED THE TPO TO RECTIFY THE MISTAKE IN CONS IDERING THE COMPARABLE COMPANY AND THE LD. TPO MADE RECTIFICATION TO DOWNW ARD ADJUSTMENT AND THE :-3-: I.T.A. NO.38/MDS/2013 LD. AO WITH THE SAID ADJUSTMENTS ASSESSED THE TOTAL INCOME OF RS. 3,85,85,393/- VIDE ORDER U/S. 143 R.W.S. 144C(3) OF THE ACT. AGGRIEVED BY THE ORDER AND THE ASSESSEE COMPANY FILED AN APPEAL WITH THE TRIBUNAL. 3. THE LD. AR ARGUED THE GROUNDS ON THE CUSTOM DUTY ADJUSTMENT, WHERE THE LOWER AUTHORITIES ERRED IN LAW AND ON FAC TS NOT CONSIDERING THE CUSTOM DUTY ADJUSTMENT AND IGNORING THE FUNDAMENTAL PRINCIPLES BEHIND CLAIMING NON-CENVATABLE CUSTOM DUTY ADJUSTMENT AMOU NTING TO RS. 142,005,128/- AND THE TPO/DRP/AO ERRED IN LAW AND O N FACTS IN REJECTING THE CUSTOM DUTY ADJUSTMENT ON ASSUMPTION THAT BENEFIT O F CUSTOM DUTY WOULD HAVE BEEN PASSED TO ASSOCIATED ENTERPRISE (AE) AND CONSEQUENTLY SHIFTED THE TAX BASE. THE LD. TPO HAS FOUND THAT THE ASSESSEE COMPANY IS ENGAGING IN HEAVY DUTY DUMP TRUCKS FOR USE IN MINES AND EARTH M OVING AND MOST OF THE MATERIALS ARE IMPORTED FROM ASSOCIATE ENTERPRISE (A E) AND HAS 5 COMPARABLES AND WORKED OUT THE PLI AT 9.69% AND AFTER CONSIDERI NG THE WORKING CAPITAL ADJUSTMENT THE PLI ADJUSTED AND WORKED OUT TO 4.25% . THE ASSESSEE COMPUTED PLI PERCENTAGE BASED ON THE CUSTOM DUTY, F OREX LOSS AND IDLE CAPACITY. THE ASSESSEE COMPANY ALSO OPERATES 'MARK ET SUPPORT DIVISION' WHICH RENDERS MARKETING AND AFTER SALE SUPPORT TO A E'S FOR WHICH IT EARNED COMMISSION AND THE MARK UP COST WORKED OUT TO 82.17 % WITH 7 COMPARABLES PLI BEING 24.04% AND THE WEIGHTED PLI OF 3 YEARS IS 16.02%. THE LD. TPO FOUND THAT THE CUSTOM DUTY PAID BY THE ASSESSEE COM PANY IS RS. :-4-: I.T.A. NO.38/MDS/2013 417,728,928/- AND AN AMOUNT OF RS. 142,005,128/- IS NON-CENVATABLE DUTY IN ASSESSEE CASE IS HIGHER DUE TO HIGHER IMPORT COMPON ENT. THE LD. TPO CONSIDERED THE SUBMISSION OF THE ASSESSEE DATED 20. 10.2011 AND FOUND THAT THE ASSESSEE REITERATED ITS STAND IT HAS ADDITIONAL UNCLAIMABLE EXPENDITURE, WHEREAS, IT IS NOT IN THE CASE OF COMPARABLES AND F URTHER RELIED ON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA PVT. LTD., VS ACIT IN ITA NO. 202/PN/2007. THE LD. TPO RELIED ON THE DEC ISION OF M/S. SONY INDIA PVT LTD., IN ITA NO. 1189/DEL/2005, 819/DEL/2007 & 820/DEL/2007 AT PARA 5.2 REFERRED AT PAGE 4 OF THE ORDER AND THE LD. TPO IS OF THE OPINION THAT THE ADDITIONAL CUSTOM DUTY IS NOT WARRANTED AND REJECTE D THE ADJUSTMENTS OF NON- CENVETABLE CUSTOM DUTY AND THE LD. DRP HAS CONFIRME D THE ACTION OF LD. TPO IN ITS ORDER. 4. BEFORE US, THE LD. AR SUBMITTED THAT THE COMPANY IS IN FIRST FOUR MONTHS OF ITS OPERATIONS AND HAS MADE HEAVY INVESTM ENT AND REQUIRED CUSTOM DUTY ADJUSTMENT AND TPO HAS NOT CONSIDERED T HE ADJUSTMENTS IN COMMERCIAL MARKETS AND SUBSTANTIATED THE ARGUMENTS THAT ASSESSEE COMPANY IMPORTS ARE 91% AND WHEREAS THE IMPORT COMPONENT OF COMPARABLES SELECTED IS 6.57% AND RELIED ON THE CO-ORDINATE BENCH DECISI ON IN MOTONIC INDIA AUTOMOTIVE PVT. LTD., VS ACIT ITA NO. 741/MDS/2014 DATED 17.08.2016, WHEREAS, THE LD. DR SUBMITTED THAT THE ASSESSEE IS A ASSEMBLER AND NOT A MANUFACTURER AND HIGHER COST OF INPUTS ARE PASSED O N TO THE CUSTOMERS AND :-5-: I.T.A. NO.38/MDS/2013 RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND J UDICIAL DECISIONS AND PRAYED FOR REJECTION OF THE GROUND. 5. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND THE JUDICIAL DECISIONS. THE LD. AR SUBMISSIONS ON CUSTOM DUTY ADJUSTMENT ARE REALISTIC AND THEY HAVE TO BE CONSIDERED DUE TO THE BACKGROUND OF THE COMPANY WHICH IS IN OPERATION FOR 4 MONTHS AND WITH HIGHER IMPORTED COMPONENT IN OPERATIONS. WE PLACE RELIANCE ON THE CO-ORDINATE BENCH DECISION MOTONIC INDIA AUTOMOTIVES PVT. LTD., (SUPR A) AT PARA 6 PAGE 5 WHICH READ AS UNDER: '6. THE LD. AR SUBMITTED THAT IN RESPECT OF CUSTOM DUTY COMPONENT SUITABLE ADJUSTMENT TO BE MADE WHILE DETERMINING TH E ALP. IN OUR OPINION, THE PLEA OF THE ASSESSEE IS JUSTIFIED. TH E TPO HAS NOT CONSIDERED THE CUSTOM DUTY ADJUSTMENT ON THE REASON THAT IT IS EQUIVALENT TO CENTRAL EXCISE IN COMMERCIAL MARKET. THIS IS NOT CORRECT. THE TRIBUNAL CONSISTENTLY HOLDING THAT WHILE DETERM INING ALP, THERE SHOULD BE SUITABLE ADJUSTMENT IN RESPECT OF CUSTOM DUTY, WHICH WAS CONSIDERED IN THE FOLLOWING CASES : I) SKODA AUTO INDIA (P) LTD. V. ACIT, AURANGABAD (3 0 SOT 319)[PUNE] II) TOYOTA KIRLOSKAR MOTORS PVT. LTD. V. ACIT, BAN GALORE ITA NO. 828/BANG/2010 III) PUTZMEISTER CONCRETE MACHINES PVT. LTD. V. DCI T, PANAJI ITA NO. 107/PNJ/2012 IV) DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. V. DCIT, PUNE IN ITA NO.120/PN/2011 :-6-: I.T.A. NO.38/MDS/2013 6.1 AT THIS STAGE, IT IS PERTINENT TO MENTION THE F INDING OF THE PUNE BENCH IN THE CASE OF DEMAG CRANES & COMPONENTS (IND IA) PVT. LTD. V. DCIT(SUPRA) DATED 4.1.2012 IN ITA NO.120/PN/2011, W HICH IS AS FOLLOWS : 37. WE HAVE HEARD THE PARTIES AND PERUSED THE AVAI LABLE MATERIAL ON RECORDS IN THE LIGHT OF THE SECOND LIMB OF THE GROU ND 4(B). IT IS RELEVANT MENTIONED THAT WE HAVE ALREADY ANALYSED TH E RELEVANT PROVISIONS OF INCOME TAX RULES VIS A VIS THE SCOPE OF THE ADJUSTMENTS IN THE PRECEDING PARAGRAPHS IN THE CONTEXT OF THE A DJUSTMENTS ON ACCOUNT OF THE WORKING CAPITAL. IN PRINCIPLES, OU R FINDINGS ON THE ISSUE REMAIN APPLICABLE TO THE ADJUSTMENTS ON ACCOUNT OF THE IMPORT COST MENTIONED IN GROUND 4(B) TOO. THE DIFFERENCE BETWEE N THE AL MARGIN BEFORE AND AFTER THE SAID ADJUSTMENTS ON ACCOUNT OF IMPORT COST WORKS OUT TO 0.57% (7.18%-6.61%). REVENUE HAS NOT D ISPUTED THE SAID WORKING OF THE ASSESSEE. IN THESE FACTUAL CIRC UMSTANCES AND IN THE LIGHT OF THE SCOPE OF ADJUSTMENTS DISCUSSED ABO VE, IN OUR OPINION AND IN PRINCIPLE, THE ASSESSEE SHOULD WIN ON THIS G ROUND TOO. ONE SUCH DECISION RELIED UPON BY THE ASSESSEES COUNSEL SUPP ORTS OUR FINDING RELATES TO THE DECISION OF THIS BENCH OF THE TRIBUN AL IN THE CASE OF SKODA AUTO INDIA P LTD 122 TTJ 699 (PUNE) DATED MAR CH 2009 WHEREIN, IT IS HELD (IN PARA 19 OF THE ORDER) THAT, - NO DOUBT , A HIGHER IMPORT CONTENT OF RAW MATERIAL BY ITSELF DOES NOT WARRANT AN ADJUSTMENT IN OPERATING MARGINS , AS WAS HELD IN SONY INDIA (P) LTD.S CASE (SUPRA), BUT WHA T IS TO BE REALLY SEEN IS WHETHER THIS HIGH IMPORT CONTENT WAS NECESS ITATED BY THE EXTRAORDINARY CIRCUMSTANCES BEYOND ASSESSEES CONTR OL. AS WAS OBSERVED BY A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF E- GAIN COMMUNICATION (P) LTD. (SUPRA) THE DIFFERENCE S WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE, COST CHARGED OR PAID IN, OR THE PROFIT IN THE OPEN MARKET ARE TO BE TAKEN INTO CONS IDERATION WITH THE IDEA TO MAKE REASONABLE AND ACCURATE ADJUSTMENT TO ELIMINATE THE DIFFERENCES HAVING MATERIAL EFFECT. WE DO NOT AGREE WITH THE AO THAT EVERY TIME THE ASSESSEE PAYS THE H IGHER IMPORT DUTY, IT MUST BE PASSED ON TO THE CUSTOMERS OR IT M UST BE ADJUSTED FOR IN NEGOTIATING THE PURCHASING PRICE. A LL THESE THINGS COULD BE RELEVANT ONLY WHEN HIGHER IMPORT CONTENT I S A PART OF THE BUSINESS MODEL WHICH THE ASSESSEE HAS CONSCIOUSLY C HOSEN BUT THEN IF IT IS A BUSINESS MODEL TO IMPORT THE SKD KI TS OF THE CARS, :-7-: I.T.A. NO.38/MDS/2013 ASSEMBLE IT AND SELL IT IN THE MARKET, THAT IS CERT AINLY NOT THE BUSINESS MODELS OF THE COMPARABLES THAT THE TPO HAS ADOPTED IN THIS CASE. THE ADJUSTMENTS THEN ARE REQUIRED TO BE MADE FOR FUNCTIONALLY DIFFERENCES. THE OTHER WAY OF LOOKING AT THE PRESENT SITUATION IS TO ACCEPT THAT BUSINESS MODEL OF THE A SSESSEE COMPANY AND THE COMPARABLE COMPANIES ARE THE SAME A ND IT IS ON ACCOUNT OF INITIAL STAGES OF BUSINESS THAT THE U NUSUALLY HIGH COSTS ARE INCURRED. THE ADJUSTMENTS ARE THUS REQUIR ED EITHER WAY. IT IS, THEREFORE, PERMISSIBLE IN PRINCIPLE TO MAKE ADJUSTMENTS IN THE COSTS AND PROFITS IN FIT CASES. WE ALSO DO NOT AGREE WITH THE AUTHORITIES BELOW THAT THE ONUS IS ON THE ASSESSEE TO GET ALL SUCH DETAILS OF THE COMPARABLE CONCERNS SO AS TO MAKE TH IS COMPARISON POSSIBLE. THE ASSESSEE CANNOT BE EXPECTED TO GET TH E DETAILS AND PARTICULARS WHICH ARE NOT IN PUBLIC DOMAIN. IN SUC H A SITUATION, I.E. WHEN INFORMATION AVAILABLE IN PUBLIC DOMAIN IS NOT SUFFICIENT TO MAKE THESE COMPARISONS POSSIBLE, IT IS INEVITABL E THAT SOME APPROXIMATIONS ARE TO BE MADE AND REASONABLE ASSUMP TIONS ARE TO BE MADE. THE ARGUMENT BEFORE US WAS THAT IT WAS FIRST YEAR OF ASSESSEES OPERATIONS AND COMPLETE FACILITIES ENSUR ING A REASONABLE INDIGENOUS RAW MATERIAL CONTENT WAS NOT IN PLACE. THE ASSESSEES CLAIM IS THAT IT WAS IN THESE CIRCUMSTAN CES THAT THE ASSESSEE HAD TO SELL THE CARS WITH SUCH HIGH IMPORT CONTENTS, AND ESSENTIALLY HIGH COSTS, WHILE THE NORMAL SELLING PR ICE OF THE CAR WAS COMPUTED IN THE LIGHT OF THE COSTS AS WOULD APP LY WHEN THE COMPLETE FACILITIES OF REGULAR PRODUCTION ARE IN PL ACE. NONE OF THESE ARGUMENTS WERE BEFORE ANY OF THE AUTHORITIES BELOW. WHAT WAS ARGUED BEFORE THE AO WAS MERE FACT OF HIGHER CO STS ON ACCOUNT OF HIGHER IMPORT DUTY BUT THEN THIS ARGUMEN T PROCEEDED ON THE FALLACY THAT AN OPERATING PROFIT MARGIN FOR HIGHER IMPORT DUTY IS PERMISSIBLE MERELY BECAUSE THE HIGHER COSTS ARE INCURRED FOR THE INPUTS. THAT ARGUMENT HAS BEEN REJECTED BY A CO-ORDINATE BENCH AND WE ARE IN RESPECTFUL AGREEMENT WITH THE V IEWS OF OUR ESTEEMED COLLEAGUES. THIS ADDITIONAL ARGUMENT WAS N OT AVAILABLE BEFORE THE AUTHORITIES BELOW AND IT WILL INDEED BE UNFAIR FOR US TO ADJUDICATE ON THIS FACTUAL ASPECT WITHOUT ALLOWING THE TPO TO EXAMINE ALL THE RELATED RELEVANT FACTS. WE, THEREFO RE, DEEM IT FIT AND PROPER TO REMIT THIS MATTER TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN THE LIGHT OF OUR ABOVE OBSERVATIONS. :-8-: I.T.A. NO.38/MDS/2013 38. THE PERUSAL OF THE IMPUGNED ORDERS SHOWS THAT T HE ABOVE CITED GUIDELINES BY WAY OF DECISION OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA P LTD (SUPRA) WERE NOT AVA ILABLE TO THE REVENUE AUTHORITIES. THEREFORE, WE ARE OF THE OPINI ON, THE ISSUE SHOULD BE SET ASIDE TO THE FILES OF THE TPO WITH DI RECTION TO EXAMINE THE CLAIM OF THE ASSESSEE RELATING TO THE IMPORT CO ST FACTOR AND ELIMINATE THE DIFFERENCE IF ANY. HOWEVER, THE TPO/A O/DRP SHALL SEE TO IT THAT THE DIFFERENCE IN QUESTION IS LIKELY TO MATERIALLY AFFECT THE PRICE/PROFIT IN THE OPEN MARKET AS ENVISAGED IN SUB RULE (3) OF RULE 10B OF THE INCOME TAX RULES, 1962. ACCORDINGLY, GRO UND 4(B) IS ALLOWED PRO TANTO. ACCORDINGLY, WE DIRECT THE A.O. TO GIVE SUITABLE ADJU STMENT AGAINST THE CUSTOM DUTY COMPONENT WHILE DETERMINING THE ALP. ' CONSIDERING THE FACTUAL ASPECTS AND MATERIAL ON RE CORD AND THE ORDERS OF THE LOWER AUTHORITY AND THE JUDICIAL DECISIONS, WE ARE OF THE OPINION CUSTOM DUTY ADJUSTMENT TO BE MADE WHILE CALCULATING THE ARM LEN GTH PRICE AND WE DIRECT THE TPO TO MAKE ADJUSTMENTS OF THE CUSTOM DUTY IN D ETERMINING THE ARM LENGTH PRICE AND ALLOW THE GROUND. 6. THE SECOND GROUND ARGUED BY THE LD. AR THAT THE LD. TPO HAS REJECTED THE ADJUSTMENT OF FOREIGN EXCHANGE FLUCTUA TIONS WITHOUT APPRECIATING THE FACT OF UNEXPECTED INCREASE IN THE COST OF INPUTS DUE TO UNANTICIPATED ADVERSE FOREIGN EXCHANGE FLUCTUATIONS WHERE IMPORT COMPONENT IS 91% COMPARED TO COMPARABLES WHICH HAS ONLY 5% IM PORTED COMPONENT AND HAS RESULTED IN SIGNIFICANT FOREIGN EXCHANGE LO SS OF 10.02% OF SALES. THE :-9-: I.T.A. NO.38/MDS/2013 LD. TPO WHILE DETERMINING ALP FIND THAT THE ASSESSE E COMPANY OPERATING PROFIT OF COMPARABLES HAS CONSIDERED FOREIGN EXCHAN GE FLUCTUATIONS AS NON- OPERATING ITEM. THE LD. TPO CONSIDERED THE EXCHANG E RATE OF DOLLARS AND FOREIGN EXCHANGE FLUCTUATIONS LOSS TREATED AS NON-O PERATIONAL COST. THE BUSINESS OF THE ASSESSEE MAY VARY FROM THE COMPARAB LES AND SEEK ADJUSTMENT TO SUIT ITS MODEL. THE LD. TPO HAS NOT CONSIDERED THE FACT THAT THE ASSESSEE COMPANY HAS BEEN SET UP IN YEAR 2005 C OMPARED TO THE COMPARABLE WHICH EXISTED FOR LONG TIME WITH DIFFERE NT INCOME COMPONENTS, THE TPO IS OF THE OPINION THAT THE MERE STATEMENT O F ESTABLISHED PLAYERS AND PASSING OF ADDITIONAL COST TO CUSTOMERS WILL NOT HE LP THE ASSESSEE COMPANY. FURTHER, CONSIDERING THE MARKET FLUCTUATIONS AND VA RIATIONS, THE ASSESSEE COMPANY COULD NOT ESTABLISH THE INCREASE IN PRICE O F RAW MATERIAL IN THE ADVERSE CONDITIONS AND REJECTED THE ADJUSTMENTS. TH E DRP FOUND THAT THE FOREIGN EXCHANGE LOSS ARISES IN THE COURSE OF BUSIN ESS AND THE EXCHANGE RATE FLUCTUATIONS HAVE CONSEQUENCE EFFECT ON SALE COST O PERATING EXPENSES AND NET INCOME. IF THERE ARE FLUCTUATIONS FROM YEAR TO YEA R AS A RESULT OF FOREIGN EXCHANGE RATE FLUCTUATIONS, THE FINANCIAL ANALYSIS SHOULD EXPLAIN THE VARIABILITY AND THE VARIATIONS WERE PART OF THE INPUT OF THE AS SESSEE AND UPHELD THE ACTION OF THE TPO. 7. BEFORE US THE LD. AR ARGUED THAT THERE IS LOSS O N FOREIGN EXCHANGE ADJUSTMENTS AS THE ASSESSEE HAVING TRANSACTIONS WIT H THE JAPAN :-10-: I.T.A. NO.38/MDS/2013 MANUFACTURING UNIT AND EFFECTED ADVERSELY DUE TO TH E HIGH COMPONENT OF IMPORT PRODUCTS. WHEREAS, COMPARABLES COMPANY DOES NOT HAVE RISK ON FOREIGN EXCHANGE FLUCTUATIONS AND RAW MATERIALS FRO M DOMESTIC MARKET. THE LD. AR DREW ATTENTION TO PAGE NO. 282 IN PAPER BOOK WHERE DEPRECIATION OF INDIAN RUPEE AGAINST THE JAPAN YEN HAD IMPACT ON PR OFITABILITY AND FLUCTUATIONS IN THE FINANCIAL YEAR 2007-08 AND ALSO ADVERSE IMPACT RESULTING IN FOREX LOSS TO THE COMPANY AND PRAYED THE FOREIGN EX CHANGE ADJUSTMENT SHOULD BE GRANTED AND RELIED ON THE DECISION OF HON DA TRADING CORP. INDIA PVT. LTD. VS ACIT IN ITA NO. 5297/DEL/2011 DATED 08 .03.2013 AND TRANSWITCH INDIA PVT. LTD., VS DCIT IN ITA NO. 6083/DEL/2010 D ATED 30.03.2012. CONTRA, THE LD. DR RELIED ON THE ORDERS OF THE TPO. 8. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATE RIAL ON RECORD AND THE JUDICIAL DECISIONS CITED. THE LD. AR'S CONTENT ION THAT TO GRANT FOREIGN EXCHANGE RATE ADJUSTMENTS IN DETERMINING THE ARM LE NGTH PRICE AS THE ASSESSEE HAS ENTERED INTO A CONTRACT AND THE PRICE WAS FIXED ON PREVAILING EXCHANGE RATE AND DUE TO FLUCTUATIONS IN VALUE OF T HE CURRENCY AND THERE IS A LOSS, AND SAME HAS TO BE AFFECTED IN DETERMINING A RM LENGTH PRICE. WE FOUND THE LD. AR HAS DEMONSTRATED THE FLUCTUATIONS OF JAPAN YEN DUE TO VARIOUS ECONOMIC FACTORS AND SUCH FLUCTUATIONS ARE TO BE CONSIDERED IN THE FINANCIAL STATEMENTS. WE ARE OF THE OPINION THE LD . TPO HAS TO DETERMINE THE ARM LENGTH PRICE AFTER DEALING WITH THE CORRECTNESS OF LOSS IN FOREIGN :-11-: I.T.A. NO.38/MDS/2013 EXCHANGE FLUCTUATION. WE RELY ON DECISION OF THE C O-ORDINATE BENCH IN THE CASE OF MONTONIC INDIA AUTOMOTIVE PVT. LTD., VS ACI T IN ITA NO. 741/MDS/2014, WHERE THIS ISSUE HAS BEEN DISCUSSED A T PAGE 10, PARA 9 : ' WE FIND FORCE IN THE ARGUMENT OF THE LD. AR. IT IS NORMAL THAT EXCHANGE RATE IS SUBJECT TO FLUCTUATION DUE TO ECO NOMIC CONDITIONS. WHILE DETERMINING THE ALP, ONE HAS TO CONSIDER THE SE FACTORS, MORE SO, OUR VIEW IS FORTIFIED BY THE DECISION OF THE T RIBUNAL IN THE CASES OF HONDA TRADING CORP. INDIA PVT. LTD., VS ACIT IN ITA NO. 5297/DEL/2011 FOR THE ASSESSMENT YEAR 2007-08 AND DHL EXPRESS (INDIA) PVT. LTD., VS. ACIT IN ITA NO. 7360/MUM/20 10 FOR THE ASSESSMENT YEAR 2006-07. ACCORDINGLY, WE DIRECT T HE TPO TO PROVIDE CONSIDERABLE EXCHANGE FLUCTUATION ADJUSTME NT WHILE DETERMINING THE ALP. ACCORDINGLY, THIS ISSUE IS R EMITTED TO THE FILE OF THE TPO FOR DETERMINING THE ALP AFTER CONSIDERING THE ABOVE THREE COMPONENTS I.E., CUSTOMS DUTY ADJUSTMENTS, AIR FRE IGHT ADJUSTMENT AND FOREIGN EXCHANGE FLUCTUATION ADJUSTMENT.' WITH THESE OBSERVATIONS WE DIRECT THE TPO TO MAKE A DJUSTMENT OF FOREIGN EXCHANGE FLUCTUATIONS IN DETERMINING THE ARM LENGTH PRICE. 9. THE LAST GROUND ARGUED BY THE LD. AR THAT THE AS SESSEE COMPANY IS IN ITS INITIAL PERIOD OF COMMERCIAL PRODUCTION AND THERE IS IDLE CAPACITY. THE LD. TPO HAS ERRED IN CALCULATING AVERAGE CAPACITY U TILISATION OF COMPARABLES AT 65.55%. WHEREAS, THE IDLE CAPACITY OF THE AASSESSE E IS AT 67% AND PLI WORKED OUT AT 21.73%. THE DRP SUBSEQUENTLY FOUND T HE CAPACITY ADJUSTMENT AND THE METHODOLOGY CANNOT BE ACCEPTED AND RELIED O N THE TRIBUNAL DECISION AND HELD WITH THE CAPACITY UTILISATION ADJUSTMENT C AN BE GRANTED ONLY IF ACCURATE INFORMATION IS FURNISHED BY THE ASSESSEE C OMPANY AND UPHELD THE :-12-: I.T.A. NO.38/MDS/2013 ACTION OF THE TPO. THE LD. AR FURTHER, ARGUED ON T HE IDLE CAPACITY ADJUSTMENT AS THE ASSESSEE IS IN FIRST YEAR OF COMMERCIAL OPER ATIONS. THE ASSESSEE COMPANY WAS SET UP IN 2005 AND STARTED ITS COMMERCI AL BUSINESS OPERATIONS IN DECEMBER 2007 AND HAVE HEAVILY INVESTED IN FIXED ASSETS. THE COMPANY'S PRODUCTION CAPACITY IS 200 TRUCKS, WHEREAS ACTUAL P RODUCTION MADE DURING THE YEAR 2007-08 IS 67 TRUCKS AND RESULTED IN NON-UTILI SATION CAPACITY OF 67% AND INCURRED IDLE CAPACITY COST WHICH RESULTED IN LOSS. THE COMPARABLE COMPANY OPERATIONS ARE FROM MANY YEARS WITH THE CAPACITY UT ILISATION AT 84.73%. WHEREAS, THE ASSESSEE COMPANY AVERAGE CAPACITY UTIL ISATION IS ONLY 33%. THE LD. AR SUBMITTED THAT THE IDLE CAPACITY TO BE C ONSIDERED IN RESPECT OF CAPACITY UTILISATION OF COMPARABLES AND ALSO WEIGHT ED AVERAGE CAPACITY UTILISATION AND RELIED ON THE PUNE TRIBUNAL DECISIO N OF AMDOCS BUSINESS SERVICES P. LTD., VS DCIT IN ITA NO. 1412/PN/2011 D ATED 23.07.2012 AND PRAYED FOR ALLOWING THE ADJUSTMENT OF IDLE CAPACITY . CONTRA, THE LD. DR SUBMITTED THAT THE TPO ADOPTED TNM METHOD, WHERE TH E TRANSACTIONS ARE AGGREGATED FOR ANALYSIS AND NO REASONING FOR ADJUST MENTS TO BE CONSIDERED TO CERTAIN OPERATIONS OF PRODUCTS AND PRAYED FOR DISMI SSING THE GROUND. 10. WE HEARD THE RIVAL SUBMISSIONS PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. AR CONTENTION TH AT ASSESSEE COMPANY WAS FORMED IN THE YEAR 2005 AND THE IDLE CAPACITY OF CO MPARABLES IS LOWER AND IN PRODUCTION PRIOR TO YEAR 2005. WE FIND THERE IS ST RENGTH IN ARGUMENTS OF LD. :-13-: I.T.A. NO.38/MDS/2013 AR AS THE COMPANY IS IN THE FIRST YEAR OF OPERATION WITH 4 MONTH ACTIVE OPERATIONS AND MADE HEAVY INVESTMENTS IN FIXED ASSE T AND CAPACITY IS UNDER UTILISED. WE ARE OF THE VIEW THAT THERE SHOULD BE A REASONABLE ADJUSTMENT OF NON-UTILISATION OF PRODUCTION CAPACITY BY THE LD. T PO. WE FOUND THE SIMILAR ISSUE DEALT IN THE CASE OF CO-ORDINATE BENCH DECISI ON M/S. MANDO INDIA STEERING SYSTEMS P. LTD., VS ACIT IN ITA NO. 2092/M DS/2012 FOR THE ASSESSMENT YEAR 2008-09 DATED 07.04.2004 AT PAGE 10 , PARA 10 AS UNDER: ' THE SECOND GROUND IN APPEAL IS WITH REGARD TO D OWNWARD ADJUSTMENT OF RS. 7,59,39,334/-. THE REVENUE HAS NOT DENIED THAT THE ASSESSEE IS IN INITIAL YEAR OF ITS PRODUCTION. IT IS ALSO A WELL KNOWN FACT THAT IN THE INITIAL YEARS OF PRODUCTION , THE OVER HEAD FIXED COSTS ARE MORE DUE TO UNDER-UTILISATION OF R ESOURCES. THE TPO HAS BRUSHED ASIDE THE CONTENTION OF THE ASSESSEE W ITH REGARD TO THE UNDER-UTILISATION OF CAPACITY ON THE GROUND THAT T HE ASSESSEE HAD NOT CLAIMED THE IDLE CAPACITY ADJUSTMENT IN INITIA L TP ANALSYSIS. THE TPO HAS ALSO RAISED OBJECTION THAT THE INSTALLED C APACITY HAS BEEN GIVEN IN MATRIC TONES WHEREAS THE PRODUCTION IS GI VEN IN NUMBER. DUE TO DIFFERENCE IN UNITS OF EXPRESSION, IT IS DI FFICULT TO ANALYSE THE PERCENTAGE OF CAPACITY UTILISATION. WE ARE OF THE CONSIDERED VIEW THAT UNDER UTILISA TION OF PRODUCTION CAPACITY IN THE INITIAL YEARS IS A VITAL FACTOR WH ICH HAS BEEN IGNORED BY THE AUTHORITIES BELOW WHILE DETERMINING THE ALP COST. THE TPO SHOULD HAVE MADE ALLOWANCE FOR THE HIGHER OVERHEAD EXPENDITURE DURING THE INITIAL PERIOD OF PRODUCTION. IN VIEW OF THE ABOVE, WE DEEM IT APPROPRIATE TO REMIT THIS ISSUE BACK TO TH E ASSESSING OFFICER WITH A DIRECTION TO CONSIDER THE CLAIM OF THE ASSE SSEE WITH RESPECT TO IDLE CAPACITY ADJUSTMENT DURING THE RELEVANT PERIO D WHILE DETERMINING THE ALP COST. THE ASSESSEE IS ALSO DI RECTED TO PRODUCE RELEVANT DOCUMENTS IN COMPARABLE UNITS FOR THE NEC ESSARY ANALYSIS.' :-14-: I.T.A. NO.38/MDS/2013 WE RELIED ON THE DECISION AND DIRECT TPO TO CONSIDE R THE IDLE CAPACITY ADJUSTMENTS IN THE RELEVANT FINANCIAL YEAR IN DETER MINING THE ARM LENGTH PRICE. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON TUESDAY, THE 20TH DAY OF DECEMB ER, 2016 AT CHENNAI. SD/- ( ) (CHANDRA POOJARI) ! / ACCOUNTANT MEMBER SD/- ( . ) (G. PAVAN KUMAR) $ ! /JUDICIAL MEMBER /CHENNAI, 1 /DATED: 20TH DECEMBER, 2016 JPV ' *#34 54 /COPY TO: 1. & /APPELLANT 2. *+& /RESPONDENT 3. 6 ( )/CIT(A) 4. 6 /CIT 5. 4 *## /DR 6. 9 /GF